Monday, December 1, 2008

Private Mortgage Insurance funding falls as FHA shows strains.

Mortgage Insurance Companies of America (MICA) said in a press release that new private mortgage insurance funding in dollars dropped almost 70% last month from October 2007. October 2007 was a very slow time for sales but the mortgage insurers hadn't yet adjusted their guidelines enough to cut off the dangerous loans and are now paying the price. Defaults surged 35% year over year and the numbers last year included an insurer which is no longer in business or reporting to MICA (Triad Guaranty).FHA has widely replaced the gap in insuring high Loan-To-Value mortgages and is seen as the most aggressive avenue left for funding. Borrowers have been pouring into this avenue for subprime mortgages and this is causing the cushion for losses to drop as defaults and the value of the mortgage book surges:

The audit, prepared by Integrated Financial Engineering Inc. of Rockville, Md., estimated the economic value of the FHA's insurance fund was $12.9 billion as of Sept. 30, down 39% from a year earlier.

The FHA insures lenders against defaults on home mortgages that meet standards set by the agency. The drop in the economic value of the fund largely reflects estimates of how falling home prices and growing losses on the sale of foreclosed homes will increase claims paid by the FHA. To calculate the economic value of the fund, the auditors make assumptions about future cash flows and adjust the fund's assets accordingly.

The estimated value of the fund as of Sept. 30 worked out to 3% of total loans insured by the FHA, down from 6.4% a year ago. Federal law requires the ratio be at least 2%. If the FHA runs short of money to pay claims, Congress would have to provide taxpayer funds to make up the difference. The share of new mortgages insured by the FHA jumped to 26% in this year's third quarter, from just 3% for the full year of 2007, according to Inside Mortgage Finance, a trade publication. Now that the subprime market has collapsed, the FHA is shouldering most of the risk on loans to people who can't afford more than a small down payment.

The taxpayer will foot the bill for this subprime lending but there is the possibility that if mortgage credit contracts too fast we could end up paying more in losses from an overshoot in prices (which many feel will happen anyways) than we would by funding the losses of the FHA.